Baht seen as safe from effects of Agentina's peso

The Nation January 29, 2014 1:00 am

Although economists have expressed concerns that turmoil will spread to emerging-market currencies after a plunge by Argentina's peso, it is believed that Thailand should be able to cope with the situation given its solid economic fundamentals and high foreign reserves.

In two days last week, the peso slumped by about 17-18 per cent against the US dollar, prompting panic among investors across the globe.

The resulting sell-off of the peso could spill over into other emerging-market currencies in Latin America and Asia. Five countries - Brazil, Turkey, South Africa, Indonesia and India - are in focus, given their sensitivity to currency fluctuations.

The peso's plunge last week marked Argentina's weak economy, buffeted by inflation running at an estimated 28 per cent and reserves at a seven-year low. The country saw a record US$95-billion default in late 2001 and is not able to borrow from the global financial markets. Thus its economy is growing slowly.

For the past several years, Argentina has been facing capital outflows. Reserves have tumbled at a rate of $1.1 billion a month over the past year to a seven-year low of $29.3 billion (Bt964 billion), according to Bloomberg. Spending more of the reserves on propping up the peso, the world's worst-performing currency over the past 12 months, became untenable.

In five minutes in the afternoon of the same day, there were a large number of peso offers, but no bidders were seen, heavily pressuring Argentina's currency. Investors panicked and dumped the peso, which sank by more than 18 per cent against the US dollar in only two days.

Charl Kengchon, managing director of Kasikorn Research Centre, said the peso's plunge was partly a result of Argentina's heavy dependency on China as an export destination. China's purchasing manager index has dropped below 50 points, reflecting a contraction of its manufacturing sector.

Given Argentina's history of bad economic experiences, investors are turning to other countries in Latin America and Asia. Sell-offs of Brazil's real and Turkey's lira followed, as those two countries have relatively high external debts. Brazil is also Argentina's major trading partner.

Besides all this, the United States began reducing its monetary stimulus, fuelling capital outflows from Latin American countries.

The Turkish lira has depreciated 6.3 per cent this year, the biggest decrease after Argentina's peso. An extraordinary meeting of the central bank was called yesterday, with a decision promised by midnight on measures to halt the lira's 10-day slide, the longest run since 2001.

Meanwhile, the slump in developing-country currencies raises a big question for Thailand's baht: What will be its next movement?

In reality, the baht has already confronted pressure and such questions late last year, when India's and Indonesia's currencies were being dumped by foreign investors. Those situations were not very different from what Argentina is facing now. At that time, Thailand survived on its sound economic fundamentals and high foreign reserves.

Thai economists expressed confidence that the Kingdom still has a buffer for possible currency sell-offs. Having faced capital outflows, countries such as India, Indonesia and Argentina have high inflation and consistently high current-account deficits. These factors differ from Thailand's situation.

Even though Thai economic fundamentals remain robust, however, the country is still on foreign investors' potential sell-off list every time some issue erodes their confidence. And the hot issue right now is the prolonged political chaos here.

Kobsak Pootrakool, executive vice president of Bangkok Bank, said the political issue was a major risk for foreign investors. If it becomes violent, it will affect the country's fundamentals in the medium to long term and the baht may face pressure.

"With Thailand's economic fundamentals, there may be not a concern. Foreign reserves remain high at more than $160 billion and foreign investors' outstanding amount in the Thai bond market recently stood at Bt700 billion, or about $20 billion. Even if all of that flows out, there will remain high foreign reserves," he said.